Boards turn increasingly aggressive

November 01, 1992|By Stephen Franklin | Stephen Franklin,Chicago Tribune

Joseph R. "Rod" Canion benefited from corporate America' rule that company founders are cheered, revered and exalted forever.

He was dumped last year as chief executive of Compaq Computer Corp. because of another, newer rule that says

company boards can discard their leaders once business takes a dive. Two days after Compaq showed its first loss ever, Canion was let go.

Boards apparently are amending the second rule to say they will not hesitate to use their authority if any number of things go wrong. Last week's forced resignation of Robert C. Stempel as chairman of General Motors Corp. -- precipitated by a newly aggressive board -- is proof.

Traditionally, board-induced executive turnover has occurred most frequently among newer, more volatile companies like Compaq, which was founded in 1982. On the heels of Mr. Stempel's demise, though, it would not be surprising to see top executives at wobbling giants like International Business Machines Corp. or Sears, Roebuck and Co. exposed to similar boardroom pressures.

But the results of such coups are hardly preordained. Nor is it clear whether boards can overcome inertia and muster the strength to take on insiders who run a company day-to-day.

In GM's case, Mr. Stempel's downfall was apparently engineered by John Smale, a GM board member for the last 10 years. Most of the board's members were there when GM's problems grew in the late 1980s.

In many cases, board coups fail because the effort was too late, the wrong person was chosen, or, most critically, the company's culture was not conducive to change, said Steven Kaplan, a professor of finance at the University of Chicago Graduate School of Business.

"Sometimes [a boardroom coup] helps," he said. "Sometimes [the company] is in the tank."

A recent shake-up at financially troubled Wang Laboratories Inc. is one boardroom rescue that came too late, says John Pound, a professor of finance at Harvard University.

Frederick Wang, the son of the company's founder and chairman, An Wang, was removed as the firm's president in August.

"Wang is a terrible case," Mr. Pound said. "It is bankrupt because its founder and management ran it into the ground, and there was no way for outsiders in the market to get inside and fix the problems."

But Mr. Pound sees Wang as an exception and says there are several reasons why boards are more likely today to exercise their muscle.

The first is the emergence of activist stockholders and large stockholder groups like the California Public Employees Retirement System, or CALPERS. Not only do stockholder groups exert pressure on executives, Mr. Pound said, but they push for independent nominating committees for board members.

"Not tomorrow, but within a relatively short period, they will move into the realm of saying who will become good members," said Mr. Pound, who is a consultant to corporations and investor groups.

Experts say it is important to shake up the way corporations select board members, because members are often like-minded executives or retired government officials with links to a firm's core businesses.

The result of so much inbreeding among corporations, they say, is a sea of proxy statements filled with look-alike pictures of middle-aged white men with similar careers and similar points of view.

For believers in corporate revivals and boardroom coups, inspiration can be found in the financial rebirth of Compaq.

When Mr. Canion was replaced, Compaq had suffered a $70 million quarterly loss. It was not the loss that led to his replacement, but differences with the board on the company's future, officials said then.

Eckhard Pfeiffer, Compaq's chief operating officer, took over.

"Pfeiffer has accomplished a remarkable turnaround," said Brandy Brandon, an analyst with Duff & Phelps Research Co. of Chicago. "Here is a company whose sales were declining and was widely considered to have an uncompetitive cost structure. In the last quarter, it improved sales by 50 percent."

That's the way new corporate regimes are born.

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